SYMANTEC CORP - 10-Q Quarterly Report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

FORM 10-Q


(Mark One)
þ		Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the Quarterly Period Ended June 28, 2002.

OR

o		Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the Transition Period from ________________ to ________________.

Commission File Number 0-17781

SYMANTEC
CORPORATION

(Exact name of the registrant as specified in its charter)


Delaware (State or other jurisdiction of incorporation or organization)		77-0181864 (I.R.S. employer identification no.)

20330 Stevens Creek Blvd., Cupertino, California (Address of principal executive offices)		95014-2132 (zip code)

Registrant’s telephone number, including area code:		(408) 517-8000

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

YES þ NO o

Shares of Symantec common stock, $0.01 par value per share, outstanding as of July 26, 2002 (including 2,375,136 shares of Delrina exchangeable stock): 145,068,106 shares

TABLE OF CONTENTS


Part I. Financial Information
	Item 1. Financial Statements
		CONDENSED CONSOLIDATED BALANCE SHEETS
		CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
		CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
		Notes To Condensed Consolidated Financial Statements
	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
	Item 3. Quantitative and Qualitative Disclosures about Market Risk
Part II. Other Information
	Item 1. Legal Proceedings
SIGNATURES

SYMANTEC CORPORATION

FORM 10-Q

Quarterly Period Ended June 28, 2002
Table of Contents


		Page

PART I. Financial Information

Item 1.	Financial Statements (unaudited)

	Condensed Consolidated Balance Sheets as of June 30, 2002 and March 31, 2002	3

	Condensed Consolidated Statements of Operations for the three months ended June 30, 2002 and 2001	4

	Condensed Consolidated Statements of Cash Flows for the three months ended June 30, 2002 and 2001	5

	Notes to Condensed Consolidated Financial Statements	6

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	14

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	25

PART II. Other Information

Item 1.	Legal Proceedings	26


Signatures		27

Part I. Financial Information

Item 1. Financial Statements

SYMANTEC CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS


			June 30,			March 31,
(In thousands, except par value)			2002			2002*

			(unaudited)
ASSETS

Current assets:
	Cash, cash equivalents and short-term investments		$	1,527,452		$	1,375,051
	Trade accounts receivable, net			131,701			89,223
	Inventories			5,424			7,463
	Deferred income taxes			68,050			68,621
	Other			24,577			22,461

		Total current assets		1,757,204			1,562,819
Restricted investments				119,560			124,313
Property, equipment and leasehold improvements, net				203,584			186,305
Deferred income taxes				6,066			6,207
Acquired product rights, net				58,128			65,219
Goodwill, net				525,927			525,868
Other, net				29,362			31,874

			$	2,699,831		$	2,502,605


LIABILITIES AND STOCKHOLDERS’ EQUITY

Current liabilities:
	Accounts payable		$	68,915		$	70,057
	Accrued compensation and benefits			48,683			54,419
	Deferred revenue			391,362			331,100
	Other accrued expenses			72,684			70,745
	Income taxes payable			70,103			52,777

		Total current liabilities		651,747			579,098
Convertible subordinated debentures				600,000			600,000
Other long-term liabilities				3,524			3,631
Commitments and contingencies
Stockholders’ equity:
	Preferred stock (par value: $0.01, authorized: 1,000; issued and outstanding: none)			—			—
	Common stock (par value: $0.01, authorized: 300,000; issued and outstanding: 144,802 and 143,559 shares, respectively)			1,448			1,436
	Capital in excess of par value			1,217,814			1,194,173
	Accumulated other comprehensive loss			(8,675	)		(53,013	)
	Unearned compensation			(248	)		(372	)
	Retained earnings			234,221			177,652

		Total stockholders’ equity		1,444,560			1,319,876

			$	2,699,831		$	2,502,605

* Amounts as of March 31, 2002 were derived from the March 31, 2002 audited consolidated financial statements.

The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these statements.

SYMANTEC CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS


			Three Months Ended
			June 30,

(In thousands, except net income (loss) per share; unaudited)			2002			2001

Net revenues			$	316,041		$	228,036
Cost of revenues				55,452			44,827

	Gross margin			260,589			183,209
Operating expenses:
	Research and development			45,488			39,471
	Sales and marketing			115,168			101,280
	General and administrative			15,354			12,122
	Amortization of goodwill			—			48,980
	Amortization of other intangibles from acquisitions			536			536
	Restructuring, site closures and other expenses			6,053			2,046

		Total operating expenses		182,599			204,435

Operating income (loss)				77,990			(21,226	)
	Interest income			9,646			7,587
	Interest expense			(5,291	)		—
	Income, net of expense, from sale of technologies and product lines			2,236			4,250
	Other expense, net			(991	)		(266	)

Income (loss) before income taxes				83,590			(9,655	)
	Provision for income taxes			27,021			11,563

Net income (loss)			$	56,569		$	(21,218	)

Net income (loss) per share — basic			$	0.39		$	(0.14	)

Net income (loss) per share — diluted			$	0.36		$	(0.14	)

Shares used to compute net income (loss) per share — basic				143,913			146,600

Shares used to compute net income (loss) per share — diluted				169,027			146,600

The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these statements.

SYMANTEC CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS


			Three Months Ended
			June 30,

(In thousands; unaudited)			2002			2001

OPERATING ACTIVITIES:
	Net income (loss)		$	56,569		$	(21,218	)
	Adjustments to reconcile net income (loss) to net cash provided by operating activities:
		Depreciation and amortization of property, equipment and leasehold improvements		11,815			8,275
		Amortization of debt issuance costs and other assets		1,283			85
		Amortization and write-off of acquired product rights		7,091			8,127
		Amortization of goodwill and other intangibles from acquisitions		536			49,516
		Loss on write-off of equipment and leasehold improvements		1,727			3,426
		Deferred income taxes		1,016			—
	Net change in assets and liabilities, excluding effects of acquisitions:
		Trade accounts receivable		(35,631	)		(925	)
		Inventories		2,346			3,349
		Other current assets		(465	)		(327	)
		Other assets		448			(729	)
		Accounts payable		(5,036	)		(10,343	)
		Accrued compensation and benefits		(7,247	)		(9,969	)
		Deferred revenue		43,079			24,522
		Other accrued expenses		45			(4,050	)
		Income taxes payable		15,070			(16,410	)
		Other long-term obligations		(107	)		—
		Income tax benefit from stock options		3,337			21,740

Net cash provided by operating activities				95,876			55,069

INVESTING ACTIVITIES:
	Capital expenditures			(24,430	)		(28,093	)
	Purchase of acquired businesses			(59	)		(1,535	)
	Purchase of equity investments			—			(1,000	)
	Purchases of marketable securities			(623,596	)		(205,813	)
	Proceeds from sales of marketable securities			490,914			103,870
	Proceeds from (purchases of) restricted investments			4,753			(9,284	)

Net cash used in investing activities				(152,418	)		(141,855	)

FINANCING ACTIVITIES:
	Net proceeds from sale of common stock and other			20,440			58,963

Net cash provided by financing activities				20,440			58,963

Effect of exchange rate fluctuations on cash and cash equivalents				14,270			4,775

Decrease in cash and cash equivalents				(21,832	)		(23,048	)
Beginning cash and cash equivalents				379,237			227,923

Ending cash and cash equivalents			$	357,405		$	204,875

The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these statements.

SYMANTEC CORPORATION
Notes To Condensed Consolidated Financial Statements

Note 1. Basis of Presentation

The condensed consolidated financial statements of Symantec Corporation as of June 30, 2002 and for the three months ended June 30, 2002 and 2001 are unaudited and, in the opinion of management, contain all adjustments, consisting of only normal recurring items necessary for the fair presentation of the financial position and results of operations for the interim periods. These condensed consolidated financial statements should be read in conjunction with the Consolidated Financial Statements and Notes thereto included in our Annual Report on Form 10-K for the year ended March 31, 2002. The results of operations for the three months ended June 30, 2002 are not necessarily indicative of the results to be expected for the entire year. All significant intercompany accounts and transactions have been eliminated. Certain previously reported amounts have been reclassified to conform to the current presentation format.

We have a 52/53-week fiscal accounting year. Accordingly, all references as of and for the periods ended June 30, 2002, March 31, 2002 and June 30, 2001 reflect amounts as of and for the periods ended June 28, 2002, March 29, 2002 and June 29, 2001, respectively. The three months ended June 30, 2002 and 2001 each comprised 13 weeks of activity.

All Symantec share and per share amounts in this Form 10-Q have been adjusted to reflect the two-for-one stock split effected as a stock dividend, which became effective January 31, 2002.

Recent Accounting Pronouncements

On April 1, 2002, we adopted the provisions of Statement of Financial Accounting Standards, or SFAS, No. 141, Business Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No. 141 requires that all business combinations initiated after June 30, 2001 be accounted for under the purchase method of accounting. Under SFAS No. 142, goodwill and intangible assets deemed to have indefinite lives will no longer be amortized but will be subject to an annual impairment test. Other intangibles will continue to be amortized over their useful lives. In addition, SFAS No. 142 requires acquired workforce-in-place to be reclassified as goodwill.

In accordance with SFAS No. 142, we ceased the amortization of goodwill and intangible assets deemed to have indefinite lives and recharacterized acquired workforce-in-place (and the related deferred tax liability) as goodwill on April 1, 2002. We also performed the initial goodwill impairment test required by SFAS No. 142 during the June 2002 quarter. We have identified four reporting units, our four operating segments as indicated in Note 11, and determined that there was no impairment of goodwill recorded upon implementation of SFAS No. 142. We will continue to test for impairment on an annual basis, or earlier if indicators of impairment exist.

In October 2001, the Financial Accounting Standards Board, or FASB, issued SFAS No. 144, Accounting for Impairment or Disposal of Long-Lived Assets. SFAS No. 144 supersedes SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of, and addresses financial accounting and reporting for the impairment and disposal of long-lived assets. We adopted this statement on April 1, 2002 and adoption of this statement did not have a material impact on our financial position or results of operations.

The lessors associated with lease agreements relating to certain of our facilities are special purpose entities or equivalent structures. Presently, we account for these leases as operating leases, while the special purpose entities or equivalent structures own and account for the leased assets and related liabilities in their records. In July 2002, the FASB issued a proposed interpretation of Accounting Research Bulletin No. 51, Consolidated Financial Statements, and FASB Statement No. 94, Consolidation of All Majority-Owned Subsidiaries, that addresses the consolidation of special purpose entities. The proposed interpretation provides guidance for determining when an entity (such as us), the primary beneficiary, should consolidate another entity, a special purpose entity or equivalent structure (such as the lessor), that functions to support the activities of the primary beneficiary. The expected proposed interpretation may result in us having to consolidate the financial position and operating results of the special purpose entities and equivalent structures, which are the lessors under the aforementioned operating lease agreements. The effective date of these proposed new rules could be as early as the beginning of fiscal year ending March 31, 2004, and immediately for any new leases which utilize special purpose entities or equivalent structures entered into after the new rules’ effective date.

SYMANTEC CORPORATION
Notes To Condensed Consolidated Financial Statements, Continued

Note 2. Balance Sheet Information


		June 30,			March 31,
(In thousands)		2002			2002

		(unaudited)
Cash, cash equivalents and short-term investments:
	Cash	$	125,284		$	123,030
	Cash equivalents		232,121			256,207
	Short-term investments		1,170,047			995,814

		$	1,527,452		$	1,375,051

Trade accounts receivable, net:
	Receivables	$	141,293		$	99,304
	Less: allowance for doubtful accounts		(9,592	)		(10,081	)

		$	131,701		$	89,223

Property, equipment and leasehold improvements, net:
	Computer hardware and software	$	271,537		$	260,170
	Office furniture and equipment		60,568			49,887
	Buildings and land		45,754			41,671
	Leasehold improvements		42,195			35,265

			420,054			386,993
	Less: accumulated depreciation and amortization		(216,470	)		(200,688	)

		$	203,584		$	186,305

Acquired product rights, net:
	Purchased product rights and technologies	$	125,589		$	125,589
	Less: accumulated amortization of purchased product rights and technologies		(67,461	)		(60,370	)

		$	58,128		$	65,219

Goodwill, net:
	Goodwill	$	818,130		$	818,071
	Less: accumulated amortization		(292,203	)		(292,203	)

		$	525,927		$	525,868

Other, net:
	Other long-term assets, net	$	24,907		$	26,883
	Other intangible assets		9,700			9,700
	Less: accumulated amortization of other intangible assets		(5,245	)		(4,709	)

		$	29,362		$	31,874

Accumulated other comprehensive loss:
	Unrealized gain on available-for-sale securities	$	1,317		$	718
	Cumulative translation adjustment		(9,992	)		(53,731	)

		$	(8,675	)	$	(53,013	)

SYMANTEC CORPORATION
Notes To Condensed Consolidated Financial Statements, Continued

Note 3. Goodwill, Acquired Product Rights and Other Intangible Assets

With the adoption of SFAS No. 142, we ceased the amortization of goodwill and intangible assets deemed to have indefinite lives and recharacterized acquired workforce-in-place (and the related deferred tax liability) as goodwill on April 1, 2002. Accordingly, there was no amortization of goodwill and acquired workforce-in-place during the June 2002 quarter.

The following table presents a reconciliation of previously reported net income (loss) and net income (loss) per share to the amounts adjusted for the exclusion of the amortization of goodwill and acquired workforce-in-place, net of the related income tax effect:


		Three Months Ended
		June 30,

(In thousands, except per share data; unaudited)		2002		2001

Net income (loss), as reported		$	56,569	$	(21,218	)
	Amortization of goodwill and acquired workforce-in-place, net of income tax benefit of $790		—		48,898

Net income, as adjusted		$	56,569	$	27,680

Net income (loss) per share — basic, as reported		$	0.39	$	(0.14	)
	Amortization of goodwill and acquired workforce-in-place, net of income tax benefit of $790		—		0.33

Net income per share — basic, as adjusted		$	0.39	$	0.19

Net income (loss) per share — diluted, as reported		$	0.36	$	(0.14	)
	Amortization of goodwill and acquired workforce-in-place, net of income tax benefit of $790		—		0.32

Net income per share — diluted, as adjusted*		$	0.36		0.18

^* For the June 2001 quarter, total shares used for the purpose of calculating net income per share (diluted), as adjusted include approximately 8.6 million shares issuable from the assumed exercise of outstanding options.

Acquired product rights and other intangible assets subject to amortization were as follows:


		June 30,			March 31,
(In thousands; unaudited)		2002			2002

Acquired product rights, net:
	Purchased product rights and technologies	$	125,589		$	125,589
	Less: accumulated amortization of purchased product rights and technologies		(67,461	)		(60,370	)

		$	58,128		$	65,219

Other intangible assets, net:
	Other intangible assets	$	9,700		$	9,700
	Less: accumulated amortization of other intangible assets		(5,245	)		(4,709	)

		$	4,455		$	4,991

Amortization expense for acquired product rights and other intangible assets (customer base and trade names) was $7.1 million and $536,000, respectively, during the June 2002 quarter. The estimated annual amortization expense for acquired product rights is $26.1 million, $23.9 million, $15.2 million and $59,000 for fiscal year 2003, 2004, 2005 and 2006, respectively. The estimated annual amortization expense for other intangible assets is $2.1 million, $1.9 million and $932,000 for fiscal year 2003, 2004 and 2005, respectively.

SYMANTEC CORPORATION
Notes To Condensed Consolidated Financial Statements, Continued

Note 4. Comprehensive Income (Loss)

The components of comprehensive income (loss), net of tax, were as follows:


		Three Months Ended
		June 30,

(In thousands; unaudited)		2002		2001

Net income (loss)		$	56,569	$	(21,218	)
Other comprehensive income (loss):
	Change in unrealized gain (loss) on available-for-sale marketable securities, net of a tax provision of $1,016 and none, respectively		599		(625	)
Change in cumulative translation adjustment			43,739		(934	)

Total other comprehensive income (loss)			44,338		(1,559	)

Comprehensive income (loss)		$	100,907	$	(22,777	)

Note 5. Net Income (Loss) Per Share

The components of net income (loss) per share were as follows:


	Three Months Ended
	June 30,

(In thousands, except per share data; unaudited)	2002		2001

Basic Net Income (Loss) Per Share
Net income (loss)	$	56,569	$	(21,218	)

Weighted average number of common shares outstanding during the period		143,913		146,600

Basic net income (loss) per share	$	0.39	$	(0.14	)

Diluted Net Income (Loss) Per Share
Net income (loss)	$	56,569	$	(21,218	)
Interest on convertible subordinated debentures, net of income tax effect		3,598		—

Net income, as adjusted	$	60,167	$	(21,218	)

Weighted average number of common shares outstanding during the period		143,913		146,600
Shares issuable from assumed exercise of options		7,539		—
Shares issuable from assumed conversion of convertible subordinated debentures		17,575		—

Total shares for purpose of calculating diluted net income (loss) per share		169,027		146,600

Diluted net income (loss) per share	$	0.36	$	(0.14	)

For the three months ended June 30, 2002, approximately 2.0 million shares issuable from assumed exercise of options were excluded from the computation of diluted net income per share, as their effect would have been anti-dilutive. For the three months ended June 30, 2001, approximately 14.4 million shares issuable from assumed exercise of options were excluded from the computation of diluted net loss per share, as their effect would have been anti-dilutive due to the net loss reported in the period.

SYMANTEC CORPORATION
Notes To Condensed Consolidated Financial Statements, Continued

Note 6. Common Stock Repurchases

On January 16, 2001, the Board of Directors replaced an earlier stock repurchase program with a new authorization to repurchase up to $700.0 million of Symantec common stock, not to exceed 30.0 million shares, with no expiration date. As of the end of the June 2002 quarter, we had repurchased a total of 19.6 million shares under this program at prices ranging from $17.78 to $25.58 per share, for an aggregate amount of approximately $448.8 million. No shares were repurchased during the June 2002 and June 2001 quarters.

Note 7. Convertible Subordinated Debentures

On October 24, 2001, we completed a private offering of $600 million of 3% convertible subordinated debentures due November 1, 2006, the net proceeds of which were approximately $584.6 million. The debentures are convertible into shares of our common stock by the holders at any time before maturity at a conversion price of $34.14 per share, subject to certain adjustments. We may redeem the debentures on or after November 5, 2004, at a redemption price of 100.75% of stated principal during the period November 5, 2004 through October 31, 2005 and 100% thereafter. Interest will be paid semi-annually, and we commenced making these payments on May 1, 2002. Debt issuance costs of approximately $15.8 million, related to the 3% convertible subordinated debentures, will be amortized on a straight-line basis through November 1, 2006. We have reserved approximately 17.6 million shares of common stock for issuance upon conversion of the 3% convertible subordinated debentures. As of June 30, 2002, there has been no conversion of the 3% convertible subordinated debentures.

Note 8. Acquisitions

Acquisition of Lindner & Pelc

On August 30, 2001, we purchased 100% of the outstanding shares of Lindner & Pelc Consult GmbH, a security services and implementation company in Berlin, Germany, for approximately $2.2 million. The transaction was accounted for as a purchase and we recorded approximately $2.1 million in goodwill. Under the terms of the agreement, we may also be liable for contingency payments based on targeted future sales through September 2004. The maximum aggregate amount of such contingency payments is approximately $2.0 million. During the June 2002 quarter, $694,000 was recorded as compensation expense, as it was determined that this amount of the contingency payments will be paid under the agreement. The amount of $694,000 remains as an accrual as of June 30, 2002.

Note 9. Restructuring, Site Closures and Other Expenses

During the June 2002 quarter, we recorded approximately $6.1 million for costs of severance, related benefits, outplacement services and abandonment of certain fixed assets primarily associated with the restructuring and relocation of our Leiden, Netherlands operations to Dublin, Ireland and the outsourcing of our North American and European consumer support functions. As a result of this relocation, our workforce was reduced by 251 employees. As of June 30, 2002, we had an accrual of approximately $5.3 million outstanding related to these severance, related benefits and outplacement service charges.

Details of the fiscal 2003 restructuring, site closures and other expenses were as follows:


	Cash/	Original		Amount			Amount		Balance
(In thousands)	Non-cash	Charge		Paid/Used			Adjusted		6/30/02

Employee severance and outplacement	Cash	$	5,629	$	(312	)	$	—	$	5,317
Excess facilities	Non-cash		424		(424	)		—		—

Total restructuring, site closures and other expenses		$	6,053	$	(736	)	$	—	$	5,317

SYMANTEC CORPORATION
Notes To Condensed Consolidated Financial Statements, Continued

During the March 2002 quarter, we recorded approximately $8.1 million for exit costs associated with the expansion of our Newport News, Virginia site to a larger facility in Newport News, consolidation of most of our United Kingdom facilities to Maidenhead, UK, and relocation of our Leiden, Netherlands operations to Dublin, Ireland, in efforts to consolidate our European support functions. These costs included approximately $5.8 million in rent remaining on the abandoned facilities and related exit costs, and $2.3 million in related abandoned fixed asset and leasehold improvement write-offs. As of June 30, 2002, we had an accrual of approximately $4.4 million outstanding related to rent and related exit costs of the facilities.

Also during the March 2002 quarter, we recorded approximately $950,000 for the costs of severance, related benefits and outplacement services, as we reorganized various operating functions. As a result, our workforce was reduced by 29 employees. As of June 30, 2002, we had an accrual of approximately $65,000 outstanding for related severance, related benefits and outplacement services.

During the December 2001 quarter, we recorded approximately $9.4 million for exit costs associated with the relocation of our North American support group from Eugene, Oregon to an expanded facility in Springfield, Oregon. These costs included approximately $6.7 million in rent remaining on the abandoned facilities in Eugene, Oregon and related exit costs, and $2.7 million in related abandoned leasehold improvement write-offs. As of June 30, 2002, we had an accrual of approximately $5.6 million outstanding related to rent and related exit costs of the facilities.

During the June 2001 quarter, we recorded approximately $2.0 million for the costs of employee severance, related benefits, outplacement services and abandonment of certain facilities primarily related to former AXENT operations. As a result, our workforce was reduced by 58 employees. These severance, related benefits and outplacement costs were paid by the end of the September 2001 quarter. As of June 30, 2002, we had an accrual of approximately $168,000 remaining related to the abandoned facilities.

Details of the fiscal 2002 restructuring, site closures and other expenses were as follows:


	Cash/	Original		Amount			Amount		Balance
(In thousands)	Non-cash	Charge		Paid/Used			Adjusted		6/30/02

Employee severance and outplacement	Cash	$	2,639	$	(2,574	)	$	—	$	65
Excess facilities	Cash/ non-cash		17,789		(7,650	)		—		10,139

Total restructuring, site closures and other expenses		$	20,428	$	(10,224	)	$	—	$	10,204

Note 10. Litigation and Contingencies

On June 14, 2002, Hark Chan and Techsearch LLC filed a lawsuit against us in the United States District Court for the Northern District of California, alleging that unspecified products sold on CD-ROM with Internet hyperlinks and/or with the LiveUpdate feature infringe a patent owned by Techsearch. The lawsuit requests damages, injunctive relief, costs and attorney fees. We intend to defend the action vigorously.

In May 2002, Craig Hughes filed a lawsuit in Utah state court, purportedly on behalf of a class of persons located in Utah who he asserts received unsolicited commercial email from us. The complaint alleges violation of Utah’s recently enacted Unsolicited Commercial Email Act. We intend to defend the action vigorously.

On December 23, 1999, Altiris Inc. filed a lawsuit against us in the United States District Court, District of Utah, alleging that unspecified Symantec products including Norton Ghost Enterprise Edition, infringed a patent owned by Altiris. The lawsuit requests damages, injunctive relief, costs and attorney fees. In October 2001, a stipulated judgment of non-infringement was entered following the court’s ruling construing the claims of the Altiris patent, and Altiris has appealed the ruling. We intend to defend the action vigorously.

In July 1998, the Ontario Court of Justice (General Division) ruled that we should pay a total of approximately $4.7 million for damages, plus interest, to Triolet Systems, Inc. and Brian Duncombe in a decade-old copyright action, for damages arising from the grant of a preliminary injunction against them. The damages were awarded following the court’s ruling that evidence presented later in the case showed the injunction was not warranted. We inherited this case through our acquisition of Delrina Corporation, which was the plaintiff in this lawsuit. Our appeal of the decision was denied, and we have requested leave to seek further review of that decision. We recorded a charge of approximately $5.8 million during the June 1998 quarter, representing the unaccrued portion of the judgment plus

SYMANTEC CORPORATION
Notes To Condensed Consolidated Financial Statements, Continued

costs, and an additional charge of approximately $3.1 million for post-judgment interest and other costs during the March 2002 quarter. As of June 30, 2002, we believe that we have adequately accrued for both the damages and costs.

In October 1997, a complaint was filed in the United States District Court for the District of Utah on behalf of PowerQuest Corporation, against Quarterdeck, which we acquired in March 1999. The complaint alleges that Quarterdeck’s partitioning software, included in Partition-It and Partition-It Extra Strength, violated a patent held by PowerQuest. In January 1998, PowerQuest obtained a second patent relating to partitioning and has amended its complaint to allege infringement of that patent as well. The plaintiff has added us as a defendant and seeks an injunction against distribution of Partition-It and Partition-It Extra Strength and monetary damages. We intend to defend the action vigorously.

On September 15, 1997, Hilgraeve Corporation filed a lawsuit in the United States District Court, Eastern District of Michigan, against us, alleging that unspecified Symantec products infringe a patent owned by Hilgraeve. The lawsuit requests damages, injunctive relief, costs and attorney fees. In March 2000, the court granted our summary judgment motions and dismissed the case. In September 2001, the Court of Appeals for the Federal Circuit reversed the summary judgment and ordered the case returned to the District Court. We intend to defend the action vigorously.

Over the past few years, it has become common for software companies, including us, to receive claims of patent infringement. At any given time, we are evaluating claims of patent infringement asserted by several parties, with respect to certain of our products. The outcome of any related litigation or negotiation could have a material adverse impact on our future results of operations or cash flows.

We are also involved in a number of other judicial and administrative proceedings that are incidental to our business. We intend to defend all of the aforementioned pending lawsuits vigorously and although adverse decisions (or settlements) may occur in one or more of the cases, the final resolution of these lawsuits, individually or in the aggregate, is not expected to have a material adverse affect on our financial condition, although it is not possible to estimate the possible loss or losses from each of these cases. Depending, however, on the amount and timing of an unfavorable resolution of these lawsuits, it is possible that our future results of operations or cash flows could be materially adversely affected in a particular period. We have accrued certain estimated legal fees and expenses related to certain of these matters; however, actual amounts may differ materially from those estimated amounts.

Note 11. Segment Information

Our operating segments are significant strategic business units that offer different products and services, distinguished by customer needs. We have five operating segments: Enterprise Security, Enterprise Administration, Consumer Products, Services and Other.

The Enterprise Security segment focuses on providing Internet security technology, global response and services necessary for organizations to manage their information security needs. The Enterprise Administration segment offers products that enable companies to be more effective and efficient within their information technology departments. The Consumer Products segment focuses on delivering our security and problem-solving products to individual users, home offices and small businesses. The Services segment is focused on providing information security solutions that incorporate best-of-breed technology, security expertise and global resources to help enable e-business success. The Other segment is comprised of sunset products and products nearing the end of their life cycle. Also included in the Other segment are all indirect costs, general and administrative expenses, amortization of goodwill (through March 31, 2002) and other intangible assets and charges that are one-time in nature, such as acquired in-process research and development, legal judgments and settlements and restructuring, site closures and other expenses which are not charged to the other operating segments.

SYMANTEC CORPORATION
Notes To Condensed Consolidated Financial Statements, Continued

The following table summarizes each segment’s net revenues from external customers, operating income (loss), and depreciation and amortization expense:


	Enterprise		Enterprise		Consumer								Total
(In thousands; unaudited)	Security		Administration		Products		Services			Other			Company

Three Months Ended June 30, 2002
Revenue from external customers	$	131,879	$	55,839	$	123,908	$	3,675		$	740		$	316,041
Operating income (loss)		27,517		41,077		61,318		(4,830	)		(47,092	)		77,990
Depreciation & amortization expense		2,599		118		945		119			16,944			20,725
Three Months Ended June 30, 2001
Revenue from external customers		97,670		59,476		65,143		2,310			3,437			228,036
Operating income (loss)		17,033		40,205		12,862		(5,115	)		(86,211	)		(21,226	)
Depreciation & amortization expense		2,458		111		717		104			62,613			66,003

Geographical Information


		Three Months Ended
		June 30,

(In thousands; unaudited)		2002		2001

Net revenues from external customers:
	United States	$	166,172	$	121,116
	Other foreign countries		149,869		106,920

		$	316,041	$	228,036

Note 12. Subsequent Events

In July 2002, we announced that we had entered into agreements to acquire three privately-held companies, Riptech, Inc., Recourse Technologies and, SecurityFocus, for $145 million, $135 million and $75 million in cash, respectively. We expect to complete each of these acquisitions in the second quarter of fiscal 2003.

Riptech, Inc. is a provider of scalable, real-time managed security services that protect clients through advanced outsourced security monitoring and professional services.

Recourse Technologies is a provider of security threat management solutions that detect, analyze and respond to both known and novel threats, including intrusions, internal attacks and denial of service attacks.

SecurityFocus is a provider of enterprise security threat management systems, providing global early warning of cyber attacks, customized and comprehensive threat alerts, and countermeasures to prevent attacks before they occur.

In July 2002, we also announced that we acquired Mountain Wave, Inc. for $20 million in cash. Mountain Wave, Inc. is a provider of automated attack sensing and warning software and services for real-time enterprise security operations management.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

FORWARD-LOOKING STATEMENTS AND FACTORS THAT MAY AFFECT FUTURE RESULTS

The following discussion contains forward-looking statements which are subject to safe harbors under the Securities Act of 1933 and the Securities Exchange Act of 1934. The words “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “continue” and similar expressions identify forward-looking statements. In addition, any statements which refer to projections of our future financial performance, our anticipated growth and trends in our businesses, and other characterizations of future events or circumstances, are forward-looking statements. These statements are only predictions, based on our current expectations about future events. We cannot guarantee future results, performance or achievements or that predictions or current expectations will be accurate. We do not undertake any obligation to update these forward-looking statements to reflect events occurring or circumstances arising after the date of this report, except as required by applicable law. These forward-looking statements involve risks and uncertainties, and our actual results, performance or achievements could differ materially from those expressed or implied by the forward-looking statements on the basis of several factors, including those that we discuss under Business Risk Factors beginning on page 20. We encourage you to read that section carefully.

All Symantec share and per share amounts in this Form 10-Q have been adjusted to reflect the two-for-one stock split effected as a stock dividend, which became effective January 31, 2002.

OVERVIEW

Symantec, a world leader in Internet security technology, provides a broad range of content and network security software and appliance solutions to enterprises, individuals and service providers. We are a leading provider of client, gateway and server security solutions for virus protection, firewall and virtual private network, vulnerability management, intrusion detection, Internet content and e-mail filtering, and remote management technologies and security services to enterprises and service providers around the world. Founded in 1982, we have offices in 38 countries worldwide.

Critical Accounting Policies

We believe there have been no significant changes in our critical accounting policies during the June 2002 quarter as compared to what was previously disclosed in Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended March 31, 2002.

Recent Events

In July 2002, we announced that we had entered into agreements to acquire three privately-held companies, Riptech, Inc., Recourse Technologies and SecurityFocus, for $145 million, $135 million and $75 million in cash, respectively. We expect to complete each of these acquisitions in the second quarter of fiscal 2003.

Riptech, Inc. is a provider of scalable, real-time managed security services that protect clients through advanced outsourced security monitoring and professional services.

Recourse Technologies is a provider of security threat management solutions that detect, analyze and respond to both known and novel threats, including intrusions, internal attacks and denial of service attacks.

SecurityFocus is a provider of enterprise security threat management systems, providing global early warning of cyber attacks, customized and comprehensive threat alerts, and countermeasures to prevent attacks before they occur.

As a result of these acquisitions, we expect our operating expenses to increase in future periods. At least initially, we expect the increase in our operating expenses to exceed the revenues attributed to these acquired companies, and that as a result, these acquisitions will be dilutive to net income, as we integrate the operations, products and services of these companies into our own offerings and continue to develop these offerings.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations, continued

RESULTS OF OPERATIONS

The following table sets forth each item from our condensed consolidated statements of operations as a percentage of net revenues and the percentage change in the total amount of each item for the periods indicated:


				Three Months Ended						Percent
				June 30,						Change
										in Dollar
				2002			2001			Amounts

(Unaudited)
Net revenues					100	%		100	%		39	%
Cost of revenues					18			20			24

		Gross margin			82			80			42
Operating expenses:
	Research and development				14			17			15
	Sales and marketing				36			44			14
	General and administrative				5			5			27
	Amortization of goodwill				—			21			(100	)
	Amortization of other intangibles from acquisitions				—			—			—
	Restructuring, site closures and other expenses				3			2			196

			Total operating expenses		58			89			(11	)

Operating income (loss)					24			(9	)		(467	)
	Interest income				3			3			27
	Interest expense				(2	)		—			*
	Income, net of expense, from sale of technologies and product lines				1			2			(47	)
	Other expense, net				—			—			*

Income (loss) before income taxes					26			(4	)		(966	)
	Provision for income taxes				8			5			134

Net income (loss)					18	%		(9	)%		(367	)

^* Percentage change is not meaningful

Net Revenues

Net revenues increased 39% to $316.0 million during the June 2002 quarter from $228.0 million during the June 2001 quarter. The increase was due primarily to increased sales of our enterprise security products and consumer products, partially offset by a decline in sales of our enterprise administration products. The increased sales of our enterprise security products and consumer products were due primarily to strong growth in our virus protection solutions. From a regional standpoint, the increase was primarily due to growth in net revenues in the United States and, to a lesser extent, in Europe. Strength in major foreign currencies during the June 2002 quarter also positively impacted our international revenue growth.

Segments

Our Enterprise Security segment provides organizations with Internet security technology, global response and services to manage their information security needs. Our Enterprise Security segment represented approximately 42% and 43% of net revenues during the June 2002 and 2001 quarters, respectively. Net revenues increased approximately $34.2 million, or 35%, during the June 2002 quarter as compared to the June 2001 quarter. This increase was primarily due to strong growth in sales of our virus protection, firewall/VPN and vulnerability management product solutions.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations, continued

Our Enterprise Administration segment offers products that enable companies to be more effective and efficient within their information technology departments. Our Enterprise Administration segment represented approximately 18% and 26% of net revenues during the June 2002 and 2001 quarters, respectively. Net revenues decreased by approximately $3.6 million, or 6%, during the June 2002 quarter as compared to the June 2001 quarter. This decrease was due to a decline in sales of our pcAnywhere product, partially offset by growth in our Ghost Corporate Edition product. The decline in our pcAnywhere product was, and may continue to be, the result of a decrease in both small business and home office sales and corporate sales.

Our Consumer Products segment provides security and problem-solving products to individual users, home offices and small businesses. Our Consumer Product segment represented approximately 39% and 29% of net revenues during the June 2002 and 2001 quarters, respectively. Net revenues increased by approximately $58.8 million, or 90%, during the June 2002 quarter as compared to the June 2001 quarter. This increase was primarily related to stronger than expected consumer and small business spending, which contributed to the increase in sales of our Norton AntiVirus, Norton System Works, and Norton Internet Security products. Our electronic distribution channel, including original equipment manufacturer subscription renewals, also contributed to the increase in sales during the June 2002 quarter. This segment’s net revenues have been seasonally lower in the June quarters as compared to the March quarters over the last three years, although only slightly lower in the June 2002 quarter by approximately $2.0 million, or 2%, from the March 2002 quarter. We do not expect that the recent level of growth in Consumer Products is sustainable in the future.

Our Services segment provides information security solutions that incorporate best-of-breed technology, security expertise and global resources to help enable e-business success. Net revenues from this segment increased slightly during the June 2002 quarter as compared to the June 2001 quarter and represented 1% of net revenues during the June 2002 and 2001 quarters. Our Other segment is comprised of sunset products and products nearing the end of their life cycle and represented less than 1% and approximately 2% of net revenues during the June 2002 and 2001 quarters, respectively.

International

Net revenues from sales outside of the United States were approximately $149.9 million and $106.9 million during the June 2002 and 2001 quarters, respectively. As a percentage of net revenues, sales outside of the United States represented approximately 47% during each of the June 2002 and 2001 quarters. The increase in absolute dollars during the June 2002 quarter as compared to the June 2001 quarter was primarily the result of sales growth in Europe and to a lesser extent in Japan and Canada.

Strength in major foreign currencies during the June 2002 quarter positively impacted our international revenue growth by approximately $6.7 million as compared to the impact of average major foreign currency rate changes during the June 2001 quarter.

Gross Margin

Gross margin represents net revenues less cost of revenues. Cost of revenues consists primarily of manufacturing expenses, costs for producing manuals and CDs, packaging costs, royalties paid to third parties under publishing contracts, costs of consulting services, technical support costs and amortization of acquired product rights.

Gross margin was approximately 82% and 80% of net revenues during the June 2002 and 2001 quarters, respectively. This increase was primarily due to higher margins associated with an increase in sales of our enterprise security products. This was partially offset by an increase in royalty and consulting service costs. Costs of consulting services increased with the related increase in consulting services revenues and our consulting services typically have lower margins than our products.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations, continued

Research and Development Expenses

Research and development expenses as a percentage of net revenues were approximately 14% and 17% during the June 2002 and 2001 quarters, respectively. The decrease in research and development expenses as a percentage of net revenues was attributed to the disproportionate growth in net revenues of 39% compared to growth in research and development expenses of 15% during the June 2002 quarter. In absolute dollars, research and development expenses increased 15% to approximately $45.5 million during the June 2002 quarter from $39.5 million during the June 2001 quarter. This increase was primarily a result of increased infrastructure related expenditures and costs of outside services.

Sales and Marketing Expenses

Sales and marketing expenses as a percentage of net revenues were approximately 36% and 44% during the June 2002 and 2001 quarters, respectively. The decrease in sales and marketing expenses as a percentage of net revenues was attributed to the disproportionate growth in net revenues of 39% compared to growth in sales and marketing expenses of 14% during the June 2002 quarter. In absolute dollars, sales and marketing expenses increased 14% to approximately $115.2 million during the June 2002 quarter from $101.3 million during the June 2001 quarter. This increase was primarily a result of increased headcount, salary increases and higher commission expenses due to the increase in sales, and increased advertising and promotion expenses.

General and Administrative Expenses

General and administrative expenses as a percentage of net revenues remained flat at approximately 5% during the June 2002 and 2001 quarters. General and administrative expenses increased 27% to approximately $15.4 million during the June 2002 quarter from $12.1 million during the June 2001 quarter. This increase was primarily a result of increased headcount, salary increases and legal fees.

Amortization of Goodwill and Other Intangibles From Acquisitions

Amortization of goodwill and other intangibles from acquisitions decreased 99% to approximately $536,000 during the June 2002 quarter from $49.5 million during the June 2001 quarter. This decrease was due to the adoption of SFAS No. 142 on April 1, 2002, under which the carrying values of goodwill and intangible assets deemed to have indefinite lives are no longer amortized, but are subject to an annual impairment test.

Restructuring, Site Closures and Other Expenses

Restructuring, site closures and other expenses increased 196% to approximately $6.1 million during the June 2002 quarter from $2.0 million during the June 2001 quarter. During the June 2002 quarter, we recorded approximately $6.1 million for costs of severance, related benefits, outplacement services and abandonment of certain fixed assets primarily associated with the restructuring and relocation of our Leiden, Netherlands operations to Dublin, Ireland and the outsourcing of our North American and European consumer support functions. As a result, our workforce was reduced by 251 employees.

Interest Income, Interest Expense and Other Expense

Interest income was approximately $9.6 million and $7.6 million during the June 2002 and 2001 quarters, respectively. The increase was due to higher average invested cash balances during the June 2002 quarter as compared to the June 2001 quarter, partially offset by lower average interest rates.

Interest expense of approximately $5.3 million during the June 2002 quarter was related to the 3% convertible subordinated debentures issued in October 2001. We recorded no interest expense during the June 2001 quarter.

Other expense, net was insignificant during the June 2002 and 2001 quarters.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations, continued

Income, Net of Expense, From Sale of Technologies and Product Lines

Income, net of expense, from sale of technologies and product lines was approximately $2.2 million and $4.3 million during the June 2002 and 2001 quarters, respectively. This income was related primarily to royalty payments received from Interact Commerce Corporation, who subsequently merged with The Sage Group plc, as a result of the divestiture of our ACT! product line in December 1999.

Income Tax Provision

Our effective tax rate on income before restructuring, site closures and other expenses and amortization of goodwill was 32% during the June 2002 and 2001 quarters. This effective tax rate was lower than the U.S. federal and state combined statutory rate primarily due to a lower statutory tax rate on income generated by our Irish operations.

Our overall effective tax rate was 32% on pre-tax income for the June 2002 quarter, and (120%) on pre-tax loss for the June 2001 quarter. The effective tax rate for the June 2002 quarter is lower than the U.S. federal and state combined statutory rate primarily due to a lower statutory tax rate on income generated by our Irish operations. The high effective tax rate for the June 2001 quarter reflects the nondeductibility of substantially all of the goodwill amortization.

Selected Pro Forma Financial Data

For comparative purposes, the following table displays, on a pro forma basis, our results of operations excluding all acquisition related amortization and one-time charges. These measures are not in accordance with, or an alternative for, generally accepted accounting principles, or GAAP, and may be different from pro forma measures used by other companies.


	Three Months Ended
	June 30,

(In thousands, except per share data; unaudited)	2002		2001

Pro forma net income	$	65,625	$	33,878

Pro forma net income per share — diluted	$	0.41	$	0.22

Shares used to compute pro forma net income per share — diluted		169,027		155,212

The following items represent the difference between the pro forma financial data and the related GAAP financial data in the Condensed Consolidated Statements of Operations.

• For the June 2002 quarter, the pro forma net income excludes all acquisition related amortization and one-time charges of $12.9 million (tax benefit of $3.9 million). For the June 2001 quarter, the pro forma net income excludes all acquisition related amortization and one-time charges of $59.5 million (tax benefit of $4.4 million).

• For the June 2001 quarter, shares used to compute pro forma net income per share (diluted) include approximately 8.6 million shares issuable from the assumed exercise of outstanding options.

Liquidity and Capital Resources

Our principal source of liquidity is our cash, cash equivalents and short-term investments. Cash, cash equivalents and short-term investments increased approximately $152.4 million to $1,527.5 million at June 30, 2002 from $1,375.1 million at March 31, 2002. This increase is primarily due to cash provided from operations, net proceeds from the exercise of stock options and sales of common stock through our employee stock purchase plan and strength in major foreign currencies. The cash provided by these factors was partially offset by cash paid for capital expenditures.

Net cash provided by operating activities during the June 2002 quarter was approximately $95.9 million and was comprised of net income of $56.6 million, net non-cash related expenses of $23.5 million and a net increase of $15.8 million in liabilities, net of an increase in assets.

Net trade accounts receivable increased by $42.5 million to approximately $131.7 million at June 30, 2002 from $89.2 million at March 31, 2002. The increase in net trade accounts receivable is primarily due to higher sales in the month of June 2002 as compared to the month of March 2002, an unusually low net trade accounts receivable balance at March 31, 2002 and the strength in major foreign currencies at June 30, 2002.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations, continued

Net cash used in investing activities during the June 2002 quarter was approximately $152.4 million and was comprised primarily of $127.9 million in net purchases of marketable securities and $24.4 million of capital expenditures.

The strength in major foreign currencies against the U.S. dollar had a positive impact on our net asset position at June 2002.

On October 24, 2001, we completed a private offering of $600 million of 3% convertible subordinated debentures due November 1, 2006, the net proceeds of which were $584.6 million. The debentures are convertible into shares of our common stock by the holders at any time before maturity at a conversion price of $34.14 per share, subject to certain adjustments. We may redeem the debentures on or after November 5, 2004, at a redemption price of 100.75% of stated principal during the period November 5, 2004 through October 31, 2005 and 100% thereafter. Interest is paid semi-annually and we commenced making these payments on May 1, 2002. We intend to use the net proceeds of the offering for general corporate purposes, including working capital, potential acquisitions, stock repurchases and investments in our infrastructure.

Subsequent to June 30, 2002, we announced plans to acquire three privately-held companies for $355.0 million in cash, and acquired another privately-held company for $20.0 million in cash.

We believe that existing cash, cash equivalents and short-term investments, cash generated from operating results and cash received from the convertible note offering will be sufficient to fund operations for at least the next year.

SYNTHETIC LEASES

We currently have two real estate leasing arrangements that we have classified as operating leases.

One of the lease arrangements is for two existing office buildings in Cupertino, California. Lease payments for these facilities are based on the three-month LIBOR in effect at the beginning of each fiscal quarter plus a specified margin. We have the right to acquire the related properties at any time during the seven-year lease period ending February 1, 2006. If, at the end of the lease term we do not renew the lease, purchase the properties or arrange for a third party to purchase the properties, we may be obligated to the lessor for all or some portion of an amount up to the guaranteed residual amount of approximately $66.0 million, representing approximately 84% of the lessor’s purchase price of the property.

On March 30, 2001, we entered into a master lease agreement for land and the construction of two office buildings, one in Newport News, Virginia, effective June 6, 2001, and another in Springfield, Oregon, effective April 6, 2001. Our lease payments are based on one-, three- or six-month LIBOR plus a specified margin. We have the right to acquire the related properties at any time during the six and one-half year lease period ending September 28, 2007. We moved into the Oregon facility immediately after the end of the December 2001 quarter and into the Virginia facility in April 2002. If, at the end of the lease term we do not renew the lease, purchase the properties or arrange for a third party to purchase the properties, we may be obligated to the lessor for all or some portion of an amount up to the guaranteed residual amount of approximately $40.0 million, representing approximately 85% of the lessor’s purchase price of the properties.

As security for each of these arrangements, we are required to maintain a cash collateral balance, the aggregate amount of which was $119.6 million at June 30, 2002. We are required to invest the cash collateral in U.S. Treasury securities or certificates of deposit with specified lenders and maturities not to exceed two to three years. In accordance with the lease terms, these funds are not available to meet operating cash requirements. As of June 30, 2002, the investments related to the California lease totaled approximately $72.4 million and the investments related to the Oregon and Virginia leases totaled $47.2 million. These amounts are classified as non-current restricted investments within the financial statements.

In addition, we are obligated to maintain certain financial covenants including a minimum cash balance, tangible net worth and quarterly earnings before income tax, depreciation and amortization, or EBITDA, and a maximum debt

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations, continued

and senior debt to EBITDA ratio. Future acquisitions, financing activities or operating losses may cause us to be in violation of these financial covenants. In the event of default, we may be required to release the cash collateral and take possession of the buildings. As of June 30, 2002, we were in compliance with all of the above covenants.

RECENT ACCOUNTING PRONOUNCEMENTS

The lessors associated with lease agreements relating to certain of our facilities, described under Synthetic Leases above, are special purpose entities or equivalent structures. Presently, we account for these leases as operating leases, while the special purpose entities or equivalent structures own and account for the leased assets and related liabilities in their records. In July 2002, the Financial Accounting Standards Board, or FASB, issued a proposed interpretation of Accounting Research Bulletin No. 51, Consolidated Financial Statements, and FASB Statement No. 94, Consolidation of All Majority-Owned Subsidiaries, that addresses the consolidation of special purpose entities. The proposed interpretation provides guidance for determining when an entity (such as us), the primary beneficiary, should consolidate another entity, a special purpose entity or equivalent structure (such as the lessor), that functions to support the activities of the primary beneficiary. The expected proposed interpretation may result in us having to consolidate the financial position and operating results of the special purpose entities and equivalent structures, which are the lessors under the aforementioned operating lease agreements. The effective date of these proposed new rules could be as early as the beginning of fiscal year ending March 31, 2004, and immediately for any new leases which utilize special purpose entities or equivalent structures entered into after the new rules’ effective date.

BUSINESS RISK FACTORS

We have grown, and may continue to grow, through acquisitions, which give rise to a number of risks that could have adverse consequences for our future operating results. We announced four acquisitions during July 2002 and will likely pursue future acquisitions. One of the recently-announced acquisitions has been completed, but completion of the other three remain subject to customary closing conditions. Integrating acquired businesses has been and will continue to be a complex, time consuming and expensive process. To integrate acquired businesses, we must implement our technology systems in the acquired operations and assimilate and manage the personnel of the acquired operations. Our success in completing the integration of acquired businesses may impact the market acceptance of such acquisitions. Further, the difficulties of integrating acquired businesses could disrupt our ongoing business, distract our management focus from other opportunities and challenges, and increase our expenses and working capital requirements. Acquisitions may result in substantial amounts of goodwill that will be subject to an annual, or if events require, a more frequent impairment test and other intangible assets that will be amortized and also subject to an annual impairment test. In addition, acquisitions may result in substantial restructuring and other related expenses and write-offs of acquired in-process research and development costs. Further, we may need to issue equity or incur additional debt to finance future acquisitions, which could be dilutive to our existing stockholders or could increase our leverage. Any of these and other factors could harm our ability to achieve anticipated levels of profitability from acquired operations or to realize other anticipated benefits of an acquisition.

There is uncertainty as to whether or not we will be able to sustain the growth rates in sales of our products, particularly in consumer antivirus protection products. During the second half of fiscal 2002 and first quarter of fiscal 2003, we experienced a higher than expected rate of growth in sales of our consumer antivirus protection products, and we expect that we will not be able to sustain this high growth rate on a consistent basis going forward. We believe that consumer antivirus sales were spurred by a number of factors, including outbreaks of the well-publicized Code Red and Nimda viruses and a reaction from the September 11 terrorist attacks. In addition, although the release of new operating systems incorporating security and virus protection features, particularly past releases of Microsoft Windows, have increased competition in our market and had a harmful effect on demand, the recent release of Windows XP may have actually spurred additional sales. These positive factors are likely to weaken over time, and it is possible that growth rates in sales of antivirus protection products may decline.

Demand for our products is subject to seasonal trends. Although there is no assurance this trend will continue, our sales of consumer products over the last six years have been seasonal, with higher sales generally in our December and March quarters. In addition, we anticipate that sales of enterprise security products may be higher in the March quarter in the future, as our sales force attempts to close transactions before the end of our fiscal year. To the extent seasonality makes it more difficult to predict our revenues and value our business, our stock price may suffer and the volatility of our stock may increase.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations, continued

Economic and political conditions and conditions affecting the network security market in particular may have a negative impact on our revenues and margins. The market for our products depends on economic conditions affecting the broader network security, Internet infrastructure and related markets. More generally, the slowdown in the U.S. economy may hurt consumer demand for our services. On the enterprise side, the continued slowdown in corporate earnings and tightening of corporate budgets may cause potential customers to delay or cancel security projects, reduce their overall or security-specific information technology budgets, or reduce or cancel orders for our products. Further, in this environment, customers may experience financial difficulty, cease operations or fail to budget for the purchase of our products. This, in turn, may lead to longer sales cycles, delays in payment and collection, and price pressures, causing us to realize lower revenues and margins. In addition, the terrorist acts of September 11, 2001 created an uncertain economic and political environment in many parts of the world, and we cannot predict the impact of these events, or of any related military action, on our customers or business.

Piracy of our software may have a significant impact on our net revenues. While we are unable to determine the exact extent of piracy of our software products, software piracy may depress our net revenues. While this would adversely affect domestic revenue, revenue loss is believed to be even more significant outside of the United States, particularly in countries where laws are less protective of intellectual property rights. We engage in efforts to educate consumers on the benefits of licensing genuine products and to educate lawmakers on the advantages of a business climate where intellectual property rights are protected and we cooperate with the Business Software Alliance in their efforts to combat piracy. However, such continued efforts may not be successful in preventing piracy of our products from occurring.

Our increased sales of enterprise-wide site licenses may increase fluctuations in our financial results. Sales of enterprise-wide site licenses through our Enterprise Security segment have been increasing and now represent a major portion of our business. This enterprise market has significantly different characteristics than the consumer market and different skills and resources are needed to penetrate this market. As our enterprise segment becomes more important to our business and our product strategy continues to develop, we may face new competitors or new levels of competition. Enterprise licensing arrangements involve a longer sales cycle than sales through other distribution channels, require greater investment of resources in establishing the enterprise relationship and can sometimes result in lower operating margins. The timing of the execution of volume licenses, or their nonrenewal or renegotiation by large customers, could cause our results of operations to vary significantly from quarter to quarter and could have a material adverse impact on our results of operations.

The trend toward consolidation in the software industry could impede our ability to compete effectively. Consolidation is underway among companies in the software industry as firms seek to offer more extensive suites of software products and broader arrays of software solutions. Changes resulting from this consolidation may negatively impact our competitive position. In addition, to the extent that we seek to expand our product lines and skills and capacity through acquisitions, the trend toward consolidation may result in our encountering competition, and paying higher prices, for acquired businesses.

We are in the process of making substantial changes to our information systems that could disrupt our business. During fiscal 2002, we began implementing Oracle 11i and a new CRM system. Oracle 11i implementation occurred in the December 2001 quarter for the United States operations and in the June 2002 quarter for the Europe, Middle East and Africa operations. The first three phases of the CRM implementation occurred in June 2001, February 2002 and June 2002, with the remaining implementation phases scheduled for the third quarter of fiscal 2003 and first quarter of fiscal 2004. These types of transitions frequently prove disruptive to the underlying business of an enterprise and may cause us to incur higher costs than we anticipate. Failure to manage a smooth transition to the new systems and the ongoing operations and support of the new systems could materially harm our business operations.

Our markets are competitive and our operating results and financial condition could be adversely affected if we are unable to anticipate or react to this competition. Our markets are competitive. If we are unable to anticipate or react to this competition, our operating results could be adversely affected by reducing our sales or the prices we can charge for our products. In the recent past, many of our competitors have significantly lowered the price of their products and we may have to do the same to remain competitive. Our ability to remain competitive depends, in part, on our ability to enhance our products or develop new products that are compatible with new hardware and operating systems. We have no control over, and limited insight into, development efforts by third parties with respect to new hardware and operating systems and we may not respond effectively or timely to such

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations, continued

changes in the market. In addition, we have limited resources and we must make strategic decisions as to the best allocation of our resources to position ourselves for changes in our markets. We may from time to time allocate resources to projects or markets that do not develop as rapidly or fully as we expect. We may fail to allocate resources to third party products, to markets or to business models that are more successful than we anticipate.

Our software products and web site may be subject to intentional disruption. Although we believe we have sufficient controls in place to prevent intentional disruptions, such as software viruses specifically designed to impede the performance of our products, we expect to be an ongoing target of such disruptions. Similarly, experienced computer programmers, or hackers, may attempt to penetrate our network security or the security of our web site and misappropriate proprietary information or cause interruptions of our services. Our activities could be substantially disrupted and our reputation, and future sales, harmed if these efforts are successful.

We face risks associated with our foreign operations. A significant portion of our net revenues, manufacturing costs and operating expenses result from transactions outside of the United States, often in foreign currencies. As a result, our future operating results could be negatively affected by fluctuations in currency exchange rates and general uncertainty with each country’s political and economic structure. In addition, governmental regulation of imports or exports or our failure to obtain any required export approval of our technologies, particularly our encryption technologies, could impede our international sales. In light of recent terrorist activity, governments could enact additional regulation or restrictions on the use, import or export of encryption technologies. Additional regulation of encryption technology could delay or prevent the acceptance and use of encryption products and public networks for secure communications. This might decrease demand for our products and services.

Introduction of new operating systems may adversely affect our financial results and stock price. The inclusion of security, remote access or virus protection tools in new operating systems and hardware packages could adversely affect our sales. For example, the inclusion of features by Microsoft in future editions of Windows which directly compete with our products may decrease or delay the demand for certain of our products, including those currently under development. Additionally, as hardware vendors incorporate additional server-based network management and security tools into network operating systems, the demand may decrease for some of our products, including those currently under development.

Our earnings and stock price are subject to significant fluctuations. Due to many factors, including those noted in this section, our earnings and stock price have been and may continue to be subject to significant volatility. There have been previous quarters in which we have experienced shortfalls in revenue and earnings from levels expected by securities analysts and investors, which have had an immediate and significant adverse effect on the trading price of our common stock. This may occur again in the future. Any such volatility may make it more difficult for us to raise capital in the future or pursue acquisitions that involve issuances of our common stock or securities convertible or exercisable into our common stock.

Fluctuations in our quarterly operating results have affected our stock price in the past and could affect our stock price in the future. If our quarterly operating results fail to meet the expectations of analysts and investors, the trading price of shares of our common stock and of the debentures could be negatively affected. Our quarterly operating results have varied substantially in the past and may vary substantially in the future depending upon a number of factors, including:

       •    the timing of announcements and releases of new or enhanced versions of our products and product upgrades;

       •    the introduction of competitive products;

       •    uncertainty about and customer confidence in the current economic conditions and outlook;

       •    reduced demand for any given product;

       •    seasonality in the end-of-period buying patterns of foreign and domestic software customers; and

       •    the market’s transition between new releases of operating systems.

In addition to the foregoing factors, the risk of quarterly fluctuations is increased by the fact that a significant portion of our net revenues has historically been generated during the last month of each fiscal quarter. Most resellers tend to make a majority of their purchases at the end of a fiscal quarter. In addition, many enterprise customers negotiate site licenses near the end of each quarter. In part, this is because these two groups are able, or believe that they are able, to negotiate lower prices and more favorable terms at that time. Our reliance on a large portion of revenue occurring at the end of the quarter and the increase in the dollar value of transactions that occur at the end of a quarter can

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations, continued

result in increased uncertainty relating to quarterly revenues. Due to this end-of-period buying pattern, forecasts may not be achieved, either because expected sales do not occur or because they occur at lower prices or on terms that are less favorable to us. In addition, these factors increase the chances that our results could diverge from the expectations of investors and analysts.

We must effectively adapt to changes in the dynamic technological environment. We are increasingly focused on the Internet security market, which, in turn is dependent on further acceptance and increased use of the Internet. The following critical issues concerning the use of the Internet remain unresolved and may affect the market for our products and the use of the Internet as a medium to distribute or support our software products and the functionality of some of our products:

       •    security;

       •    reliability;

       •    cost;

       •    ease of use;

       •    accessibility;

       •    quality of service; and

       •    potential tax or other government regulations.

In addition, new technologies, such as non PC-based Internet access devices and handheld organizers are gaining acceptance. We must adapt to these changing technological demands. If we are unable to timely assimilate changes brought about by the Internet and non PC-based environments, our future net revenues and operating results could be adversely affected.

The results of our research and development efforts are uncertain. We will need to incur significant research and development expenditures in future periods as we strive to remain competitive. The length of our product development cycle has generally been greater than we originally expected and we are likely to experience delays in future product development. In addition, a portion of our development efforts has not been technologically successful and certain products have not achieved market acceptance. As a result, the products we are currently developing or may develop in the future may not be technologically successful, achieve market acceptance or compete effectively with products of our competitors.

We are dependent upon certain distribution channels. A large portion of our sales is made through the retail distribution channel, which is subject to events that cause unpredictability in consumer demand. This increases the risk that we may not plan effectively for the future, which could result in adverse operating results in future periods. Our retail distribution customers also carry our competitors’ products. These retail distributors may have limited capital to invest in inventory. Their decisions to purchase our products are partly a function of pricing, terms and special promotions offered by our competitors and other factors that we do not control and cannot predict. Our agreements with retail distributors are generally nonexclusive and may be terminated by them or by us without cause. We would be adversely affected if companies in our chain of distributors chose to increase purchases from our competition relative to the amount they purchase from us.

Some distributors and resellers have experienced financial difficulties in the past. Distributors that account for a significant portion of our sales may experience financial difficulties in the future. If these distributors do experience financial difficulties and we are unable to move their inventories to other distributors, we may experience reduced sales or increased write-offs, which would adversely affect our operating results.

Product returns may negatively affect our net revenues. Product returns can occur when we introduce upgrades and new versions of products or when distributors or retailers have excess inventories, subject to various contractual limitations. Our return policy allows distributors, subject to these contractual limitations, to return purchased products in exchange for new products or for credit towards future purchases. End-users may return our products through dealers and distributors or to us directly for a full refund within a reasonably short period from the date of purchase. Future returns could exceed the reserves we have established for product returns, which could have a material adverse effect on our operating results.

We depend on internal communications systems that may be disrupted. Our order management and product shipping centers are geographically dispersed. A business disruption could occur as a result of natural disasters or the interruption in service by communications carriers. If our communications between these centers are disrupted, particularly at the end of a fiscal quarter, we may suffer an unexpected shortfall in net revenues and a resulting

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations, continued

adverse impact on our operating results. Communications and Internet connectivity disruptions may also cause delays in customer access to our Internet-based services or product sales.

We are subject to litigation that could adversely affect our financial results. From time to time, we may be subject to claims that we have infringed the intellectual property rights of others, or other product liability claims, or other claims incidental to our business. We are currently involved in a number of lawsuits. We intend to defend all of these lawsuits vigorously. However, it is possible that we could suffer an unfavorable outcome in one or more of these cases. Depending on the amount and timing of any unfavorable resolutions of these lawsuits, our future results of operations or cash flows could be materially adversely affected in a particular period.

Although infringement claims may ultimately prove to be without merit, they are expensive to defend and may consume our resources or divert our attention from day-to-day operations. If a third party alleges that we have infringed their intellectual property rights, we may choose to litigate the claim and/or seek an appropriate license from the third party. If we engage in litigation and the third party is found to have a valid patent claim against us and a license is not available on reasonable terms, our business, operating results and financial condition may be materially adversely affected.

We must attract and retain personnel in a competitive marketplace. We believe that our future success will depend in part on our ability to recruit and retain highly skilled management, marketing and technical personnel. To accomplish this, we believe that we must provide personnel with a competitive compensation package, including stock options. Increases in shares available for issuance under our stock options plans require stockholder approval in many cases, and institutional stockholders, or stockholders generally, may not approve future increases. Additionally, there are several proposals in the Congress and in the accounting industry to require corporations to include a compensation expense in their statement of operations relating to the issuance of employee stock options. If such a measure is approved, we may decide to issue fewer stock options. As a result, we may be impaired in our efforts to attract and retain necessary personnel.

Our intellectual property and proprietary rights may not be adequately protected from all unauthorized uses. We regard our software and underlying technology as proprietary. We seek to protect our proprietary rights through a combination of confidentiality agreements and copyright, patent, trademark and trade secret laws. Third parties may copy aspects of our products or otherwise obtain and use our proprietary information without authorization or develop similar technology independently. All of our products are protected by copyright laws, and we have a number of patents and patent applications pending. We may not achieve the desired protection from, and third parties may design around, our patents. In addition, existing copyright laws afford limited practical protection. Furthermore, the laws of some foreign countries do not offer the same level of protection of our proprietary rights as the laws of the United States, and we may be subject to unauthorized use of our products. Any legal action that we may bring to protect proprietary information could be expensive and may distract management from day-to-day operations.

Our products are complex and are operated in a wide variety of computer configurations, which could result in errors or product failures. Because we offer very complex products, undetected errors, failures or bugs may occur when they are first introduced or when new versions are released. Our products often are installed and used in large-scale computing environments with different operating systems, system management software and equipment and networking configurations, which may cause errors or failures in our products or may expose undetected errors, failures or bugs in our products. In the past, we have discovered software errors, failures and bugs in certain of our product offerings after their introduction and have experienced delays or lost revenues during the period required to correct these errors. Our customers’ computer environments are often characterized by a wide variety of standard and non-standard configurations that make pre-release testing for programming or compatibility errors very difficult and time-consuming. Despite testing by us and by others, errors, failures or bugs may not be found in new products or releases after commencement of commercial shipments. Errors, failures or bugs in products released by us could result in negative publicity, product returns, loss of or delay in market acceptance of our products or claims by customers or others. In addition, if an actual or perceived breach of network security occurs in one of our end customer’s security systems, regardless of whether the breach is attributable to our products, the market perception of the effectiveness of our products could be harmed. Because the techniques used by computer hackers to access or sabotage networks change frequently and generally are not recognized until launched against a target, we may be unable to anticipate these techniques. Alleviating any of these problems could require significant expenditures of our

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations, continued

capital and resources and could cause interruptions, delays or cessation of our product licensing, which could cause us to lose existing or potential customers and would adversely affect results of operations.

Most of our license agreements with customers contain provisions designed to limit our exposure to potential product liability claims. It is possible, however, that these provisions may not prove effective in limiting our liability.

Increased utilization and costs of our technical support services may adversely affect our financial results. Like many companies in the software industry, technical support costs comprise a significant portion of our operating costs and expenses. Over the short term, we may be unable to respond to fluctuations in customer demand for support services, including periods of high customer usage in which delays may be experienced. We also may be unable to modify the format of our support services to compete with changes in support services provided by competitors. Further, customer demand for these services could cause increases in the costs of providing such services and adversely affect our operating results.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

We believe there have been no significant changes in our market risk exposures during the June 2002 quarter as compared to what was previously disclosed in our Annual Report on Form 10-K for the year ended March 31, 2002.

Part II. Other Information

Item 1. Legal Proceedings

Information with respect to this Item may be found in Note 10 of Notes to Condensed Consolidated Financial Statements in this Form 10-Q, which information is incorporated into this Item 1 by reference.

Items 2, 3, 4, 5 and 6 are not applicable and have been omitted.

SIGNATURES

Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


Date: August 8, 2002	SYMANTEC CORPORATION (Registrant)

	By	/s/ John W. Thompson

		John W. Thompson, Chairman and Chief Executive Officer

	By	/s/ Gregory Myers

		Gregory Myers, Chief Financial Officer and Senior Vice President of Finance


	Riptech, Inc. is a provider of scalable, real-time managed security services that protect clients through advanced outsourced security monitoring and professional services.

	Recourse Technologies is a provider of security threat management solutions that detect, analyze and respond to both known and novel threats, including intrusions, internal attacks and denial of service attacks.

	SecurityFocus is a provider of enterprise security threat management systems, providing global early warning of cyber attacks, customized and comprehensive threat alerts, and countermeasures to prevent attacks before they occur.

	•		For the June 2002 quarter, the pro forma net income excludes all acquisition related amortization and one-time charges of $12.9 million (tax benefit of $3.9 million). For the June 2001 quarter, the pro forma net income excludes all acquisition related amortization and one-time charges of $59.5 million (tax benefit of $4.4 million).

	•		For the June 2001 quarter, shares used to compute pro forma net income per share (diluted) include approximately 8.6 million shares issuable from the assumed exercise of outstanding options.

	•		the timing of announcements and releases of new or enhanced versions of our products and product upgrades;

	•		the introduction of competitive products;

	•		uncertainty about and customer confidence in the current economic conditions and outlook;

	•		reduced demand for any given product;

	•		seasonality in the end-of-period buying patterns of foreign and domestic software customers; and

	•		the market’s transition between new releases of operating systems.

	•		security;

	•		reliability;

	•		cost;

	•		ease of use;

	•		accessibility;

	•		quality of service; and

	•		potential tax or other government regulations.